Doman Building Materials Group Ltd T.DBM

RBC

[retiredcf]

Their upside scenario target is $13.00. GLTA

Doman Building Materials Group Ltd.

Bigger & Better; discounted valuation sets up attractive return outlook

Our view: Doman Building Materials Group Ltd. ("Doman") reported Q321 results that were below our expectations in what was quite a messy quarter given the sharp fall in wood product pricing and the integration of the major Hixson Lumber Sales acquisition. Doman shares have fallen by ~30% since early-May; and although lumber prices bottomed in late-August, the company's shares have not followed. In our view, more steady markets underpinned by strong demand should be positive for Doman's operating results going forward. Therefore, we are reiterating our Outperform rating.

Key points:

Reiterating our $10 price target and Outperform rating – Our price target reflects a ~7.5x EV/EBITDA multiple on our 2022E EBITDA of ~$228MM. We expect Doman shares to trade above the high end of the typical Canadian Paper & Forest Products trading range (5.0x to 7.0x), reflecting Doman's ability to pass through prices to customers.

Q321 results were below our expectations – Adjusted EBITDA of $35MM was below our $45MM forecast and consensus at $41MM. Relative to our forecasts, higher-than-expected operating expenses more than offset higher-than-expected revenue, which led to a lower-than-expected gross margin. Management noted that the company managed through downward commodity pricing pressures by being focused on margin protection and working through higher-priced inventories.

Increasing the quarterly dividend to $0.14 – Reflecting confidence in the business, the Board of Directors is increasing the quarterly dividend +$0.02 to $0.14 per share starting in Q4/21. Doman has paid dividends for 47 consecutive quarters.

Outlook – Management expects the favorable demand environment for new residential construction, particularly for single-family homes, to continue into next year. Given that a significant percentage of Doman's sales are driven by activity in the repair & remodel sector, the company also expects residential repair & remodel activity to remain elevated. With prices stabilizing, Doman is optimistic that the elevated levels of volatility are over and that it will enable the company to leverage top-line growth, economies of scale, and stabilizing margins at target levels.

Management continues to employ strategies to mitigate the impact of construction materials price volatility – Strategies employed by the company include vendor-managed inventories, direct shipments from the manufacturer to the customer, and the company's internal policy of optimizing inventory levels to maintain a high standard of customer service and minimizing excess inventory exposed to market fluctuation.

Certain items remain scarce; but Doman's scale is an advantage –

Management highlighted that the company is still on allocation for certain products such as LP SmartSide and James Hardie siding. We expect that higher prices for these products and Doman's important position in the distribution channel position the company well to generate growth in its Specialty & Allied Products business